November Jobs Won’t Deter Fed

The government reported that 210,000 jobs were created in November, below expectations for 550,000. Before we all go nuts about the “miss” or call this a “disappointing report”, remember that these numbers are subject to two subsequent revisions, which is exactly what has been happening since the gnashing over the weakness of the summer reports.

Diane Swonk, Chief Economist at Grant Thornton said that the COVID recession/recovery has made life difficult for the Bureau of Labor Statistics, as “it is increasingly hard to seasonally adjust the data given the distortions created by the pandemic. The number swings are too large to capture with the old rules of thumb used to make those adjustments.” After parsing the report, she believes “that the overall labor market was much stronger than the payroll data alone would suggest during the month.”

Additionally, the unemployment rate dropped to 4.2 percent from 4.6 percent, and it did so amid a 594,000 increase in the labor force and an increase in the participation rate to 61.8 percent. While the participation rate is not back to the 63.3 percent pre-pandemic level, the COVID recession may not be the culprit.

Participation “peaked in March 2000 and trended steadily downward for nearly twenty years”, according to economist Joel Naroff. He says the long expansion after the Great Recession brought more people into the workforce, but the economy was likely to revert to a lower rate as Boomers retired in large numbers. We are not that far “below where we might have been if the pandemic didn’t hit,” which suggests that job growth could be more muted in 2022, to “a sustainable, full employment level of somewhere between 175,000 and 225,000 per month.”

What does this report mean for the last Federal Reserve Open Market Committee (FOMC) meeting on December 14-15? In his recent Congressional testimony, Chair Jerome Powell said that the central bank would likely taper bond buying sooner, because inflation remains hotter than officials would like. He also admitted that we can retire the term “transitory” when it comes to inflation, because there is little evidence that higher prices are temporary in nature. Powell’s remarks caught some by surprise, because it was just a month earlier when the FOMC outlined their strategy for removing the emergency monetary policies of bond buying and zero percent interest rates.

What changed over the course of November to prompt Powell’s acceleration of tapering? Perhaps the fact that inflation is running at the quickest pace in three decades, the dour readings of consumer sentiment, or the recent Gallup poll that showed 45 percent of U.S. adults say that price increases are causing them financial hardship.” Regardless of the reason for the shift, there was little in the November jobs report that would deter the Fed, at this point. Swonk says that the Fed “will welcome the drop in unemployment and jump in participation in the labor market with open arms. The shortfall in payrolls will not stop the Fed from accelerating the pace of tapering at its December meeting.”

Powell’s comments on the accelerated taper, coming on the heels of the WHO announcement of Omicron and the uncertainty that another variant has introduced, threw investors for a loop. Some decided that they would rather sell their stock positions, while still sitting atop more than 20 percent returns for the year.

Does this mean that you should abandon stocks and go to cash? Come on, you know the answer to that question! As always, the advice remains: stick to your game plan, which incorporates a diversified portfolio of holdings that can see you through various conditions.

To that point, the folks at Vanguard have crunched the numbers on the historical risk and return among income, balanced and growth portfolios from 1926-2020. The results are a good reminder that you need not be a hero and select the best performing asset class, or specific security, in any given year. Rather, it’s best to understand when you will need access to your investments and how comfortable you are with the gyrations of markets from year to year.

You may be the kind of person who believes that earning an average annual return of 10.3 percent for a 100 percent stock portfolio is totally worth the high-highs and the low-lows. Conversely, you might prefer to limit those ranges and be perfectly content with an average annual return of 9.1 percent for a portfolio with 60 percent stocks and 40 percent bonds. Whatever your decision, avoid allowing market movements to spook you into changing your plan.